Question

Question 2: (16 marks) Wastewater Ltd acquired an item of plant on 1 July 2016 for $3 660 000. When the item of plant was acquired, it was initially assessed as having a life of 10000 hours. During the reporting period ending 30 June 2017 the plant was operated for 3000 hours. At 1 July 2017 the plant had a remaining useful life of 7000 hours. On 1 July 2017 the plant underwent a major upgrade costing $234 600. Management believes that this upgrade will add a further 2000 hours of operating time to the plant's life. During the reporting period ended 30 June 2018 the plant was operated for 4000 hours. On 1 July 2018 the plant underwent a further major upgrade, the cost of which amounted to $344 900, and this added a further 3100 hours' operating time to its life. During the reporting period ending 30 June 2019 the plant was operated for 3800 hours. Required: Prepare all the journal entries that Wastewater Ltd would prepare for the years ending 30 June 2017, 30 June 2018 and 30 June 2019 to account for the acquisition, subsequent expenditure and depreciation on the asset. Question 3: (10 Marks) Energy Ltd is involved in the research and development of a new type of three-finned surfboard. For this R & D it has incurred the following expenditure: • $50 000 obtaining a general understanding of water-flow dynamics • $30 000 on understanding what local surfers expect from a surfboard • $90000 on testing and refining a certain type of fin $190 000 on developing and testing a full prototype of the three-finned board, to be called the thruster' There is expected to be a very large market for the product, which will generate many millions of dollars in revenue. REQUIRED Determine how the above expenditure would be treated for accounting purposes

Answer 1

Question 2)

Date	Particulars	Dr	Cr
01/07/2016	Plant a/c	$3660000
	To Bank		$3660000
30/06/2017	Depreciation a/c	$1098000
	To Plant a/c		$1098000
30/06/3017	profit and loss a/c	$1098000
	To Depreciation a/c		$1098000
01/07/2017	Plant a/c	$234600
	To Bank		$234600
30/062018	Depreciation a/c	$1242933.33
	To Plant a/c		$1242933.33
30/06/2018	Profit and loss a/c	$1242933.33
	To Depreciation		$1242933.33
01/07/2018	Plant a/c	$344900
	To Bank		$344900
30/06/2019	Depreciation a/c	$890685.598
	To Plant a/c		$890685.598
30/06/2019	profit and loss a/c	$890685.598
	To Depreciation		$890685.598

Question 3)

The amount of research and development need to charged to profit and loss account as and when incurred unbuttons the development expenses can be treated as capital expense only if reasonable certainity of future benefits exist and are realisable.

In the given case $50000, $30000, $90000 are to be charged to profit and loss account immediately and $190000 need to capitalized and written off over the period of benefit realization.